What is Key Person Insurance?
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A successful business knows its employees' strengths and knows how to help them excel in their job. But what happens when an employee who has a lot of responsibility, who might have years of irreplaceable experience, is no longer able to work?
If they are retiring a business will have had time to anticipate the end of a career and should have plans in place to keep things running smoothly. But what if an accident or sickness means they cannot work, or in a worst-case scenario, means they will never be able to return to work? A shock like this to the day-to-day running of a business can have seriously negative consequences from direct loss of income to far-reaching effects due to the loss of that employee's knowledge or connections. Key person insurance is a way of protecting your business from the unexpected.
What is key person insurance?
Key person insurance in Canada is a type of life insurance that a business takes out on an employee whose loss would negatively affect their ability to operate. Because it is taken out by a business rather than an individual, it can also be considered a type of business insurance. Let's break it down so all the roles are clear using the following table:
| Question | Answer |
|---|---|
| Who owns the policy? | the business |
| Who is insured by the policy? | the employee |
| Who is the beneficiary of the policy | the business |
If you are asking yourself, "why would a business owner choose key person insurance", let's take an example. Tanya, 31, has set up a successful architecture firm with her friend Milly in Ontario. Their business is going well and the roster of clients is expanding. Since Tanya is the architect and Milly is the project manager, they might consider that Tanya is essential to the business continuing and decide to take out key person insurance.
Since her job is mobile and requires her to be able to draw as well as tour sites, they might also consider taking out key person disability insurance, which would cover them in case she injures herself temporarily or permanently. Having this insurance in place means that if Tanya breaks her wrists wakeboarding on Haida Gwaii, she knows that her business will be protected from loss of income while she is unable to work. Short-term disability insurance covers her loss of income, key person insurance covers the loss of income to the business.
Ready to have a look at what's on offer?
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How much does key person insurance cost?
Working out the cost of key person insurance is complex and is affected by many variables including the obvious ones like annual turnover and investment brought by the insured person but also other factors like the anticipated excess pay rise to attract a replacement.
Luckily we have a tool from Sun Life below, which can help you model projected costs.
Is key person life insurance tax deductible?
As a type of life insurance policy the payout in case of a death is not considered income. Therefore in Canada, key person life insurance payouts are not taxable.
The premiums paid into a key person insurance policy, like all life insurance policies are not tax-exempt. This means you cannot claim them as expenses for tax relief.
What kinds of key person insurance are there?
Two types of key person insurance can be bought separately or bundled together. One covers in case an employee dies. The other, if they are unable to return to work due to an accident or illness.
Key person life insurance
A key person life insurance policy can provide term life insurance or permanent life insurance. When purchasing a key person life insurance policy you will need to decide which is more appropriate to your business situation.
Key person disability insurance
Key person insurance can be a death benefit-only policy, that is, a life insurance policy bought by the business. Some providers also offer a key person disability policy which protects your business from loss of income and other expenses due to sickness or injury.
Who needs key person insurance?
Key person insurance is intended to protect employees or owners whose presence and ability to work are crucial to a business's ability to operate. Small businesses that have a workforce where no one is replaceable could consider taking out key person insurance to protect income while the business finds a suitable replacement.
What kind of employee would you buy key person insurance for?
Alternatively, a large company which has a charismatic and well-known individual may want to take out key person insurance so that it can weather a loss of confidence if that individual should become ill or, in the worst case, die. We can imagine perhaps, a tech start-up where the founder is seen as a visionary and their loss might make it difficult for the company to attract the same level of investment. We could also imagine that replacing this individual might necessitate putting together a very attractive offer for someone of similar stature.
Good to know
A sole proprietorship or a partnership will probably not need key person insurance.
The best way to find the right policy for your business's specific needs is to speak to an insurance broker. Start comparing business insurance policies today:
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